The world’s biggest bond market kicked off the week on the back foot as geopolitical pressures abated and traders positioned for this week’s key inflation data.

Treasury 10-year yields rose to the highest since November and came within a striking distance of the 4.5 per cent level that some investors are watching as a threshold that could determine whether rates will revisit the 2023 highs. Traders’ conviction on three quarter-point rate cuts from the Federal Reserve this year is quickly dissipating, with markets now favoring just two reductions.

Traders await key CPI data.

Economists surveyed by Bloomberg forecast Wednesday’s consumer price index will show some easing of inflation pressures. Yet the core gauge, which excludes food and energy costs, would be up 3.7 per cent from a year earlier — above the Fed’s 2 per cent target.

“After Monday’s solar eclipse, US core inflation will determine if the shadow that markets increasingly price over a June rate cut will grow larger or pass by,” said Morgan Stanley strategists including Matthew Hornbach. 

Benchmark 10-year yields rose two basis points to 4.42 per cent — after hitting 4.46 per cent earlier Monday. The S&P 500 hovered near 5,200. Megacaps were mixed, with Nvidia Corp. down and Tesla Inc. up almost 5 per cent. Oil fell as Israel said it would remove some troops from Gaza. Bitcoin topped $71,000.

With some Fed members questioning the wisdom of cutting rates if inflation remains in a “sticky” holding pattern, this week’s inflation figures may have a lot riding on them, according to Chris Larkin at E*Trade from Morgan Stanley.

“While the Fed was hesitant to read too much into back-to-back months of higher-than-expected inflation data, a third month may lead them to change their tune,” he noted.

Economists at JPMorgan Chase & Co. led by Michael Feroli pushed back their forecast for the first Fed rate cut of the cycle after a strong March jobs report. They now expect the US central bank to start easing monetary policy in July instead of June.

“While investors seem to be anxiously awaiting easing monetary policy, the current environment does not quite scream ‘rate cuts!’” said Jason Pride at Glenmede. “With a strong labor market, expanding manufacturing and climbing commodity prices, the Fed will likely be in no rush to cut rates.”

Swap contracts imply around 60 basis points of US monetary easing this year, which means two cuts is the most likely outcome with the first expected by September, according to Bloomberg pricing. On Friday, the chance of a third cut was still above 50 per cent.

A rise in bond yields might be driven by “the wrong reasons” and will put stocks under pressure, according to JPMorgan strategists led by Mislav Matejka.

The team expects US 10-year yields to drop amid elevated geopolitical risks, while noting the risk of inflation staying too hot. Given the potential for inflation overshoot, stocks with high financing costs could stay under pressure, the strategists wrote.

The rally in stock markets is likely to pause going into the earnings season as buybacks taper out through blackout periods and equity inflows turn flat due to seasonality, according to Deutsche Bank AG strategists led by Parag Thatte and Binky Chadha.

Wall Street is expecting a subdued earnings season from Corporate America despite the first-quarter’s stock market fireworks. 

Strategists predict that S&P 500 companies will post their smallest year-over-year profit growth since 2019, just 3.9 per cent, in the first quarter, according to data compiled by Bloomberg Intelligence. But in this case the market may be onto something, because those forecasts could very well turn out to be overly gloomy — like they were in the fourth quarter, when expectations were for around 1 per cent growth and the actual results turned out to be over 8 per cent.

“The recent resiliency of inflation reduces the immediacy of rate cuts, which puts more pressure on earnings to drive future market gains,” said Richard Saperstein at Treasury Partners. “Given the elevated market multiples and rising bond yields, we remain cautious on stocks until earnings season delivers clear evidence of earnings growth.”

Wells Fargo Securities’ Christopher Harvey just put Wall Street’s highest target on the S&P 500 Index for 2024 based on his expectation that the US equity rally will power on through the year.

Harvey lifted his year-end forecast on the benchmark to 5,535 from 4,625 previously, making him the biggest bull among strategists tracked by Bloomberg. The growth potential from artificial intelligence technology and an improved earnings outlook are among the upside catalysts he sees, along with longer time horizons and higher valuation thresholds from investors, Harvey told clients in a note on Monday.

Corporate Highlights:

Tesla Inc. plans to unveil its long-promised robotaxi later this year as the carmaker struggles with weak sales and competition from cheap Chinese electric vehicles.

99 Cents Only Stores LLC has filed for bankruptcy after announcing plans in April to wind down its business operations.

The stocks of apartment landlords staged a rally after Blackstone Inc., the world’s largest commercial real estate owner, stepped up its bet on the industry.

United Airlines Holdings Inc. is delaying two new routes due to growth restrictions imposed while US aviation authorities carry out a safety review of the carrier.

Spirit Airlines Inc. announced an extensive cost-cutting program, less than three months after its proposed combination with JetBlue Airways Corp. fell through because of antitrust concerns.

The US plans to award Taiwan Semiconductor Manufacturing Co. $6.6 billion in grants and as much as $5 billion in loans to help the world’s top chipmaker build factories in Arizona, expanding President Joe Biden’s effort to boost domestic production of critical technology.

Alibaba Group Holding Ltd. is cutting prices for cloud customers from the US to Singapore by as much as 59 per cent, mirroring deep discounts at home as the once high-flying division struggles to fend off rivals and revive growth.

Key events this week:

• China aggregate financing, money supply, new yuan loans, Tuesday
• Japan PPI, Wednesday
• Canada rate decision, Wednesday
• US CPI, Fed minutes, Wednesday
• Chicago Fed President Austan Goolsbee speaks, Wednesday
• China PPI, CPI, Thursday
• Eurozone ECB rate decision, Thursday
• US initial jobless claims, PPI, Thursday
• New York Fed President John Williams speaks, Thursday
• Boston Fed President Susan Collins speaks, Thursday
• China trade, Friday
• US University of Michigan consumer sentiment, Friday
• Citigroup, JPMorgan and Wells Fargo due to report results, Friday.
• San Francisco Fed President Mary Daly speaks, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 was little changed as of 4 p.m. New York time
• The Nasdaq 100 was little changed
• The Dow Jones Industrial Average was little changed
• The MSCI World index rose 0.2 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.1 per cent
• The euro rose 0.2 per cent to $1.0857
• The British pound rose 0.1 per cent to $1.2655
• The Japanese yen fell 0.1 per cent to 151.84 per dollar

Cryptocurrencies

• Bitcoin rose 3.6 per cent to $71,783.07
• Ether rose 8.9 per cent to $3,705.8

Bonds

• The yield on 10-year Treasuries advanced two basis points to 4.42 per cent
• Germany’s 10-year yield advanced four basis points to 2.43 per cent
• Britain’s 10-year yield advanced two basis points to 4.09 per cent

Commodities

• West Texas Intermediate crude fell 0.4 per cent to $86.53 a barrel
• Spot gold rose 0.4 per cent to $2,338.53 an ounce

This story was produced with the assistance of Bloomberg Automation.